Picard on Proposed Hedge Fund Registration

Designed to further regulatory reform, the Private Fund Investment Advisers Registration Act of 2009 (Proposed Act) would expand the pool of investment advisers required to register with the SEC by eliminating those portions of the Investment Advisers Act of 1940 (Advisers Act) that currently exempt advisers with fewer than fifteen clients. Because the exemption allows advisers to count a fund as a single client, its elimination will require many managers to register and file with the SEC. In this Analysis, Marie E. Picard discusses financial regulatory reform and analyzes the Proposed Act. She writes:

Section 402 of the Proposed Act seeks to amend the Advisers Act definition of "private fund" to include all 3(c)(1) and 3(c)(7) funds, . . . [See 15 USCS § 80a-3], that are either organized in the United States or have 10% or more of their outstanding securities owned by United States persons. Under the Proposed Act, any "private fund" with assets under management in excess of $30 million would be required to register with the SEC, regardless of the number of clients it advises.

Furthermore, foreign investment advisers could also become subject to registration unless they met the narrow definition of "foreign private adviser," which is limited to investment advisers that have no place of business in the U.S., have had fewer than 15 clients in the United States in the preceding 12 months, and have less than $25 million in assets under management attributable to United States clients. In order to meet the exemption, such foreign advisers would also be required to not hold themselves out generally to the public in the United States as investment advisers or act as an adviser to a registered investment company or business development company under the Investment Company Act.

The Proposed Act also seeks to amend Section 204 of the Advisers Act to increase the reporting requirements and regulatory oversight of all registered advisers of private funds. Registered advisers would be required to maintain the following information for each private fund they advise:

Assets under management.

Use of leverage.

Counterparty credit risk exposures.

Trading and investment positions.

Trading practices.

Any other information that the SEC, in consultation with the Board of Governors of the Federal Reserve System, deems necessary or appropriate for the protection of investors.